Accountants Computer Services, Inc. v. Kosydar

• Decision Date: 03 July 1973
• Docket Number: Nos. 72-263,72-660 and 72-860,s. 72-263
• Citation: Accountants Computer Services, Inc. v. Kosydar, 35 Ohio St.2d 120, 298 N.E.2d 519 (Ohio 1973)
• Parties: , 64 O.O.2d 72 ACCOUNTANTS COMPUTER SERVICES, INC., Appellant, v. KOSYDAR, Tax Commr., Appellee. CENTRAL DATA SYSTEMS, INC., Appellant, v. KOSYDAR, Tax Commr., Appellee. The ANDREW JERGENS CO., Appellant, v. KOSYDAR, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 120

35 Ohio St.2d 120

298 N.E.2d 519, 64 O.O.2d 72

ACCOUNTANTS COMPUTER SERVICES, INC., Appellant, v. KOSYDAR, Tax Commr., Appellee.

CENTRAL DATA SYSTEMS, INC., Appellant, v. KOSYDAR, Tax Commr., Appellee.

The ANDREW JERGENS CO., Appellant, v. KOSYDAR, Tax Commr., Appellee.

Nos. 72-263, 72-660 and 72-860.

Supreme Court of Ohio.

July 3, 1973.

Syllabus by the Court

1. In determining whether a 'sale' of tangible personal property may be excepted from the sales tax by the last sentence of R.C. 5739.01(B), the proper test is to determine whether the transaction involves a consequential or inconsequential professional, insurance, or personal service. If the service rendered is inconsequential, the exception is not available and the entire transaction is taxable. If a consequential service is rendered, then it must be ascertained whether the transfer of the tangible personal property was an inconsequential element of the transaction. If so, then none of the consideration paid is taxable.

2. In determining whether a mixed transaction constitutes a consequential personal service transaction, a distinction must be made as to the true object of the transaction contract; that is, is the real object sought by the buyer the service per se or the property produced by the service.

3. Where a transaction is mixed in such a manner that the tangible personal property transferred and the service rendered are distinct consequential elements having a fixed and ascertainable relationship between the value of the property and the value of the service rendered so that both may be separately stated, there exist two separate transactions, and the one attributable to the sale of the tangible personal property is subject to taxation under R.C. 5739.01(B) while the other is not.

4. 'Printed matter,' as used in R.C. 5739.01(B) is a subcategory of 'tangible personal property,' and may be the subject of an exception from taxation therein provided for in regard to inconsequential transfers made in conjunction with consequential personal service transactions.

Each of these cases arises out of a sales and/or use tax assessment made by the Tax Commissioner of the state of Ohio. Each also involves a transaction, in the course of which there is transferred, printed or other productions or reproductions of written or graphic matter. The relevant facts pertaining to each individual case are as follows:

In case No. 72-263, Accountant's Computer Services, Inc. (ACS), a data processing company, receives raw data in the form of punch paper tapes or adding machine tapes upon which are recorded debits and credits which constitute records of current financial transactions of a particular business enterprise.

Thereafter, ACS, on its premises, transcribes the information from the tapes onto key punched cards, and, with the use of data processing machines, it sorts, systematically classifies and rearranges this data.

Print-outs of this rearranged data are furnished to the accountant-customer of ACS and in that form are used by the customer as drafts of financial statements, books of original entry, cash receipt journals, sales journals, cash disbursement journals and general ledgers. Historically, the function above described was a part of the accounting profession. Known as 'write-up work,' it was performed mannually by the accountant or his staff. The print-out, now furnished by ACS, duplicates the accountant's write-up efforts.

The Tax Commissioner assessed the entire charge made by ACS as a sale. ACS appealed to the Board of Tax Appeals, arguing that the assessment was arbitrary, unreasonable, unconstitutional and not according to law in that its 'activities constitute a service, and said services are specifically exempt under Sect. 5739.01(B), O.R.C.' The board affirmed the assessment order of the Tax Commissioner.

Case No. 72-660, Central Data Systems, Inc. (CDS), also involves a data processing company. CDS obtains information from its customers for analysis of business problems and the data is furnished by the customer in a continuous ongoing manner.

The activity of CDS is described by the board in its decision, as follows:

"The taxpayer is engaged in the business of providing both computing and software (brains and paper) sales and services which fall into four categories: (1) Data Processing is the operator's time, machine time, and the various reports and supplies billed generally on a monthly basis. (2) Key Punching is where the operator's time usually is billed at an hourly rate or 1000 card price. In this procedure the company takes the data, paper, or document, and has it transcribed into punched cards. (3) Systems Design and Programming primarily consists of program and system time by the hour; sometimes on a flat fee. The company's professional workers apply thinking to the customer's present system and then write instructions to automate the systems as in the case of upgrading machines from hand bookkeeping. (4) Contracts, which, are not involved herein, are the outside consulting division done almost always at the clients' place of business which is billed for the consultants time only by the hour where no forms are used. Both (3) and (4) are considered software but 3 does provide certain computer printouts in addition to consultation.

"* * * The testimony was uncontradicted that the appellant provided its operation on a twenty four hour day, seven day each week basis and that during the audit period appellant had 35 to 40 employees."

Again, the Tax Commissioner assessed the entire charge made by CDS as a sale, and the board, finding that CDS's activities constituted a transfer of tangible personal property which was not eligible for exception under R.C. 5739.01(B) as an inconsequential transfer, affirmed the assessment in its entirety.

In case No. 72-860, Andrew Jergens Company (AJC) contracted with A. C. Neilsen Company, a market research organization whose function is to provide services which consist of compiling statistical data as to the movement of consumer products into and from drug stores, food stores and mass merchandiser stores; to interpret this data in order to determine marketing information as to these products on a national basis and in specific geographic areas; and to analyze, interpret and present to its customers the statistical information compiled and assist management in making marketing decisions based on this data.

During the audit period, AJC utilized the services of Neilsen with respect to both hand lotions and toilet soaps. As to each of these products, it prescribed specifications for the information it wanted from Neilsen-as to the product class, the particular brands of products within each such class, and the sizes of each such brand. It also prescribed that the information was to be assembled on a nationwide basis and in accordance with specific sales territories. These specifications were changed from time to time during the audit period as to each of the products. The information requested by AJC included information not only as to its own products but also as to products of its competitors.

As an integral part of the service furnished, Neilsen assigned to account executives to AJC's account, whose duty it was to analyze, interpret and present to AJC's management the information developed by Neilsen in a meaningful and useful manner.

Once again, and for the same reasons, the Board of Tax Appeals affirmed the assessment order.

The causes are now before this court upon appeals from the Board of Tax Appeals.

Roudebush, Adrion, Brown, Corlett & Ulrich and Charles J. O'Toole, Cleveland, for appellant in case No. 72-263, ACS.

Burke, Haber & Berick and Marvin S. Zelman, Cleveland, for appellant in case No. 72-660, CDS.

Dinsmore, Shohl, Coates & Deupree, Bart A. Brown, Jr., Scott B. Crooks and Thomas S. Calder, Cincinnati, for appellant in case No. 72-860, AJC.

William J. Brown, Atty. Gen., Dwight C. Pettay, Jr., and Peter A. Stratigos, Columbus, for appellee.

STERN, Justice.

The essential issue common to each of these three cases is the applicability of the exception from taxation provided by R.C. 5739.01(B) for items of tangible personal property which are transferred, as an inconsequential element for which no separate charge is made, in conjunction with a transaction which also involves some significant degree of contracted-for service. Resolution of this issue necessitates an examination of the taxing scheme provided by statute in Ohio.

The Board of Tax Appeals, in its decisions, placed controlling weight upon the combined impact of two clauses found in R.C. 5739.01(B), i. e., the amendatory 'printed matter' ¹ language, and the amendatory 'excepting' ² language following the phrase 'Other than as provided in this section, * * *.'

The board's argument is summarized by the following language from its decision in these cases: 'The prefatory language in the 'personal service transaction' stating 'Other than as provided in this section * * *' clearly and unambiguously dictates that where a particular transaction is defined as a 'sale' by another phrase of Section 5739.01(B), Revised Code, then the 'personal service transaction' exemption (exception) is not applicable.'

The board's decision interprets the language of R.C. 5739.01(B) to require (1) taxation of all transactions involving 'printed matter,' regardless of inconsequentiality, and (2) that when such 'printed matter' is transferred in conjunction with a service transaction the entire consideration paid is taxable, including that portion which may clearly and separately have been paid as compensation for the personal service rendered.

We cannot agree that the General Assembly intended such a serious and farreaching construction of R.C. 5739.01(B), i. e., the imposition of a sales tax on professional, insurance, and personal service transactions, which, inconsequentially or otherwise, involved a transfer of ...